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    Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650
    Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650
    Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650
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    Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650

    By Oscar Gelderblom

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    Cities of Commerce develops a model of institutional change in European commerce based on urban rivalry. Cities continuously competed with each other by adapting commercial, legal, and financial institutions to the evolving needs of merchants. Oscar Gelderblom traces the successive rise of Bruges, Antwerp, and Amsterdam to commercial primacy between 1250 and 1650, showing how dominant cities feared being displaced by challengers while lesser cities sought to keep up by cultivating policies favorable to trade. He argues that it was this competitive urban network that promoted open-access institutions in the Low Countries, and emphasizes the central role played by the urban power holders--the magistrates--in fostering these inclusive institutional arrangements. Gelderblom describes how the city fathers resisted the predatory or reckless actions of their territorial rulers, and how their nonrestrictive approach to commercial life succeeded in attracting merchants from all over Europe.



    Cities of Commerce intervenes in an important debate on the growth of trade in Europe before the Industrial Revolution. Challenging influential theories that attribute this commercial expansion to the political strength of merchants, this book demonstrates how urban rivalry fostered the creation of open-access institutions in international trade.

    LanguageEnglish
    PublisherPrinceton University Press
    Release dateSep 8, 2013
    ISBN9781400848591
    Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650
    Author

    Oscar Gelderblom

    Oscar Gelderblom is associate professor of economic history at Utrecht University. He is the editor of The Political Economy of the Dutch Republic.

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      Book preview

      Cities of Commerce - Oscar Gelderblom

      Cities of Commerce

      THE PRINCETON ECONOMIC HISTORY OF THE WESTERN WORLD

      Joel Mokyr, Series Editor

      A list of titles in this series appears at the back of the book

      Cities of Commerce

      THE INSTITUTIONAL FOUNDATIONS OF INTERNATIONAL TRADE IN THE LOW COUNTRIES, 1250–1650

      Oscar Gelderblom

      PRINCETON UNIVERSITY PRESS

      Princeton & Oxford

      Copyright © 2013 by Princeton University Press

      Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540

      In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock,

      Oxfordshire OX20 1TW

      press.princeton.edu

      All Rights Reserved

      Jacket Art: Map of Amsterdam, from Civitates Orbis Terrarum (c.1572), by

      Georg Braun (1541–1622) and Frans Hogenburg (1535–90); colored engraving

      by Joris Hofnagel (1542–1600). Private Collection/The Stapleton Collection.

      Photo courtesy of The Bridgeman Art Library.

      Library of Congress Cataloging-in-Publication Data

      Gelderblom, Oscar.

      Cities of commerce : the institutional foundations of international trade in the Low

      Countries, 1250-1650 / Oscar Gelderblom.

          pages cm.— (The Princeton economic history of the Western world)

      Includes bibliographical references and index.

      ISBN 978-0-691-14288-3 (hardcover : alk. paper) 1. Benelux countries—

      Commerce—History—To 1500. 2. Benelux countries—Commerce—History—16th

      century. 3. Benelux countries—Commerce—History—17th century. I. Title.

      HF3595.G45 2013

      382.09492—dc23

          2013004034

      British Library Cataloging-in-Publication Data is available

      This book has been composed in Sabon

      Printed on acid-free paper. ∞

      Printed in the United States of America

      10 9 8 7 6 5 4 3 2 1

      Voor mijn ouders

      Contents

      Illustrations

      FIGURES

      TABLES

      Acknowledgments

      MANY PEOPLE AND INSTITUTIONS ASSISTED ME IN THE WRITING OF THIS book. I am grateful to the Netherlands Organisation for Scientific Research (NWO), the Research Institute for History and Culture of Utrecht University, the Department of Economics of the University of California, Los Angeles, the International Institute of Social History in Amsterdam, the Centre for Urban History at the University of Antwerp, the Paris School of Economics, and the Netherlands Institute for Advanced Study in Wassenaar. Debbie Tegarden, Joseph Dahm, Tom Broughton-Willett, Seth Ditchik, and other staff members at Princeton University Press have been a tremendous help in the preparation of this book.

      I thank several publishers for permission to reproduce (parts of) articles that appeared in their journals: The Decline of Fairs and Merchant Guilds in the Low Countries, 1250–1650, Jaarboek voor Middeleeuwse Geschiedenis 7 (2004): 199–238; The Governance of Early Modern Trade: The Case of Hans Thijs, 1556–1611, Enterprise & Society 4, no. 4 (2003): 606–39; and The Resolution of Commercial Conflicts in Bruges, Antwerp, and Amsterdam (1250–1650), in Law and Long-Term Economic Change: A Eurasian Perspective, edited by Debin Ma and Jan Luiten van Zanden (Stanford, Calif.: Stanford University Press 2011), 244–76.

      Many students and colleagues have offered stimulating comments on research papers and draft chapters, among them Dan Bogart, Lars Börner, Giuseppe Dari-Mattiacci, Mauricio Drelichman, the late Larry Epstein, Benjamin Guilbert, Don Harreld, Marjolein ’t Hart, Danielle van den Heuvel, Naomi Lamoreaux, Bas van Leeuwen, Clé Lesger, Jan Lucassen, Ghislaine Lydon, Debin Ma, John Munro, Larry Neal, Sheilagh Ogilvie, Lodewijk Petram, Gilles Postel-Vinay, Dave de Ruysscher, Liesbeth Sparks, Oliver Volckart, Jan de Vries, Herman van der Wee, and Marietje van Winter. Special thanks go to Jessica Dijkman, Laura Guerra, Heleen Kole, and Jeroen Puttevils for excellent research assistance. I was also fortunate to present my work, in various stages of development, to audiences at the Centre for Urban History of the University of Antwerp, the Free University of Berlin, the Early Modern History Workshop of the California Institute of Technology, the University of British Columbia, Cambridge University, Lund University, the Paris School of Economics, Stanford University, and our very own Economic and Social History Seminar at Utrecht University.

      I owe a great debt of gratitude to colleagues who read the entire manuscript, sometimes more than once: Bas van Bavel, Tracy Dennison, Avner Greif, Stuart Jenks, Abe de Jong, Wijnand Mijnhardt, Roger de Peuter, Jeroen Puttevils, Francesca Trivellato, Jan Luiten van Zanden, the readers of Princeton University Press, and last but not least Maarten Prak. I especially thank Regina Grafe, Bruno Blondé, and Peter Stabel for what they taught me in our joint work on the organization of international trade in premodern Europe. From beginning to end I have enjoyed the friendship of Joost Jonker and Jean-Laurent Rosenthal, whose comments and encouragement have made this a much better book. By the same token, Joel Mokyr, the editor of this series, deserves my deep gratitude. He made me contemplate the lessons we can learn from history, and he patiently guided my efforts to expound my views. Needless to say, I alone am responsible for any errors that remain.

      My family has always been there for me. When our son was born in November 2004, I assured Nathalie this book was almost done. As it turned out, she and Guus had to wait slightly longer to see it in print, but sharing this moment with them is a great gift. It is with equal gratitude that I dedicate this book to my parents, for their unconditional love and support.

      Cities of Commerce

      CHAPTER 1

      Introduction

      WHEN SPANISH TROOPS CAPTURED ANTWERP IN AUGUST 1585 THE CITY’S merchants faced a difficult choice. They could stay, if they accepted the sovereignty of Philip II, but commercial prospects were bleak since large groups of Flemish textile workers had already left for France, England, and Holland and Dutch rebels blocked the river Scheldt and the Flemish coast. An alternative was to move to Protestant London, but here the local business elite actively tried to exclude newcomers. The Atlantic ports of Rouen and Nantes offered good connections to many countries in Western Europe, but France was embroiled in civil war, just like the Northern Netherlands where Zeeland and Holland remained fully exposed to military action. Hamburg and Emden in northern Germany were safer havens, but their Baltic affairs languished. Eventually Amsterdam attracted most traders from Antwerp. The immigration there started with merchants who specialized in the exchange of grain and textiles with the Baltic region, but soon enough the Dutch port became the preferred destination of merchants with a much broader commercial outlook, including a considerable number of German, Portuguese, English, and Italian merchants.

      Amsterdam’s rise to commercial primacy was a remarkable achievement. Within fifteen years the city managed to create well-functioning markets for the widest possible variety of goods, financial services, and commercial information. This, in turn, enabled local and foreign merchants to build up large, diversified businesses with Amsterdam as the central node in their international network of trading agents. In the meantime, however, the Dutch Republic continued to fight Spain, exposing merchants on virtually every land and sea route to violence. In addition to this violence, newcomers in Amsterdam were confronted with agency problems that issued from the differences between their own contracting practices and those of other foreigners and local merchants. Amsterdam’s response to these challenges differed markedly from the responses of many of its urban competitors. Instead of granting safe-conducts, consular jurisdictions, or other special rights to separate groups, the city created inclusive institutional arrangements to protect all merchants, regardless of their origin, wealth, religion, or economic specialization against violence and opportunism.

      The creation of open access or generalized institutions made it easier for merchants to deal with the conflicts that issued from Europe’s political and legal fragmentation, but the origins of these more inclusive commercial regimes are subject to debate.¹ Douglass North, John Wallis, and Barry Weingast, Daron Acemoglu and James Robinson, and others emphasize the formation of stronger states with the military means to protect trade and the legal powers to adjudicate conflicts between traders. In their view, a state like the Dutch Republic could credibly commit to the safety of merchants because effective constraints on its executive power legitimized both their military and legal interventions and the fiscal efforts to provide this protection.² One problem with this explanation is that the strongest states in late medieval and early modern Europe were also the most belligerent, witness the military operations of Genoa and Venice in the eastern Mediterranean or the Atlantic power struggle among the Dutch Republic, England, and France.³ Moreover, the importance of strong states is difficult to square with the early expansion of European trade. When European merchants first started trading across longer distances in the eleventh and twelfth centuries, sovereign rulers wielded very little if any power because their territories were small and their fiscal and military resources limited.⁴

      To explain the growth of trade in the absence of strong states, Avner Greif has pointed to the development of private order solutions for the problems of violence and opportunism. Peer pressure and the prospect of repeat transactions helped merchants to keep distant agents honest, while the formation of guilds allowed them to organize boycotts and keep rulers from preying on their property.⁵ Private order solutions thus contributed to the growth of trade in two distinct ways: they reduced or even preempted the merchants’ reliance on the government to enforce contracts, and they could stimulate local or central authorities to protect merchants and provide impartial justice.⁶ But there also are problems with this explanation. Notably Sheilagh Ogilvie has argued that group formation could lead to regulatory capture and rent seeking. When local merchant guilds and chartered companies used their social capital and corporate power to exclude competitors, they could strangle economic growth.⁷ On the other hand, the historical record shows that local and foreign merchants were willing to forego a corporate status when local rulers stepped in to provide the necessary legal and commercial support for their private business operations.⁸

      The aim of this book is to develop an alternative explanation for institutional change in European commerce that is not predicated upon the existence of strong territorial states or the ability of merchants to create private order solutions. Instead, I argue that the very problem of Europe’s political and legal fragmentation also produced its solution, in the form of competition between urban governments that tried to attract trade through the continuous adaptation of their legal, commercial, and financial institutions. Cities may seem a most unlikely candidate because their political power was limited and their jurisdiction did not reach far beyond the city walls, but even though the law was local and international trade—by definition—was not, the cities’ legal autonomy actually made it easier for municipal governments to adapt institutional arrangements to the needs of international traders.⁹ At the same time, the financial resources of commercial cities, both taxes and loans, were so important for most sovereigns that they seldom clamped down on major entrepôts.¹⁰ But even then, why did the magistrates of commercial cities act in the interest of the merchant community at large instead of favoring specific groups of traders or excluding others—rent seeking behavior that can be observed in many industrial towns?¹¹ One might argue that international traders formed the government of commercial cities.¹² But this was not always the case, witness Venice or Antwerp, and even when active traders did dominate the municipal government, like in Amsterdam or London, they typically belonged to a very small political elite that excluded not just foreign merchants but also many local traders from power.¹³

      The motivation of commercial cities to create inclusive institutional arrangements, I argue in this book, issued not from the political franchise of their merchants but from the economic rivalry between these cities. Competition has long been recognized as a key feature of European history with a deep impact on the formation of states, technological change, and economic growth.¹⁴ Yet the effect of urban competition on the organization of international trade has remained largely unexplored.¹⁵ Premodern Europe was characterized by the existence of a large number of cities with the potential to become a major international market.¹⁶ Commercial leadership periodically shifted from one center to another. Achieving a leading position required strong commercial ties with other cities, which in turn stimulated a welcoming attitude toward foreign traders and targeted efforts to adapt local institutions to their business needs. Urban competition thus created a constant impetus to adapt institutions to the needs of the merchant community at large, with the arrival of new merchants further adding to the menu of institutional choices.

      To demonstrate how urban competition affected the organization of international trade at its cutting edge, this book analyzes the consecutive rise of Bruges, Antwerp, and Amsterdam to commercial primacy between 1250 and 1650. In doing so, we will be able to answer several outstanding questions regarding the organization of international trade before 1800. Why did institutional change continue in Europe for many centuries while it stagnated in other commercialized areas like the Middle East or China? Why was the adaptation of contracting institutions in Europe not confined to areas with strong cities and weak sovereigns, but instead affected every town with commercial aspirations even in absolutist states like France or Spain? On the other hand, competition between cities, or rather changes in their competitive strength, can also explain why in some of them, after long periods of openness toward foreign traders, the dynamic process of institutional change ended in regulatory capture by local elites. And finally, urban competition helps to explain why even ports at the very top of Europe’s urban hierarchy, in spite of their very sophisticated commercial and financial institutions, eventually lost their competitive advantage, producing Fernand Braudel’s now classic sequence of commercial capitals from Venice to Antwerp, Genoa, Amsterdam, and then London. But before we can answer these questions, we should consider in greater detail the dynamics of institutional change.

      STATE FORMATION AND THE GROWTH OF TRADE

      Modern theories of institutional change take the strength of sovereign rulers as a crucial variable to explain institutional continuity or change. The basic assumption is that sovereign rulers who are strong enough to protect the property of their subjects may also abuse these powers and harm the interests of their subjects.¹⁷ England is a principal reference point in all of these theories that derive from the work of English political philosophers like Hobbes, Steuart, and Smith, who were among the first to identify the crucial role of sovereigns in the protection of private property. In particular, England’s history before and after the Glorious Revolution (1688–89) has led political scientists and economic historians to argue that the establishment of constitutional government in 1688 was a prerequisite for the creation of more secure property rights, the improvement of contracting institutions, and the subsequent growth of British trade and industry in the eighteenth and nineteenth centuries.¹⁸

      From an English point of view these causal inferences seem reasonable enough because royal interventions in England’s economy had a long pedigree. In the thirteenth century kings already regulated payments and credit operations, opened their courts to local and foreign merchants, and chartered trading companies for the export of wool and cloth. In the early modern period the crown organized and reorganized London’s chartered companies, introduced radical protectionist policies, and created a standing navy with the explicit goal of furthering England’s commercial interests.¹⁹ For many economic historians the Glorious Revolution was a fundamental breakthrough, not just in politics and public finance but also in foreign trade, because it ended the privileged position of a limited number of London merchants who until then controlled virtually every sector of international commerce.²⁰ According to Acemoglu, Johnson, and Robinson (2005) the political revolution was indeed caused by the emergence of a new group of merchants in England’s rapidly expanding Atlantic trade. Their growing political power would have forced the English crown to support institutional arrangements that benefited the merchant community at large.²¹

      The English case is nevertheless a poor foundation for empirical generalizations about the role of central governments in the organization of trade because the political situation was very different from that in the rest of Europe. London was the main gateway for domestic producers and foreign traders, but it was also the country’s political and administrative center, as a result of which the crown had very close ties to the local business elite. On the European Continent, whether in Spain, France, Germany, or the Dutch Republic, the major commercial cities were always at a distance from the seat of government. As a result, there was no Continental equivalent of the chartered companies that controlled England’s exports to Europe, and even though several princes opened up their central courts to commercial litigation, they could not fulfill their promise to adjudicate conflicts between merchants from different legal backgrounds because proceedings were too slow and the professional lawyers too ignorant about mercantile usage.²² Consequently, merchants on the Continent had to rely on the market facilities and legal services provided by individual cities to support their trade.

      A further drawback of the model proposed by Acemoglu, Johnson, and Robinson is its exclusive focus on Atlantic trade. The political and economic demands of London’s colonial merchants did not necessarily reflect the concerns of English traders who operated within Europe. Whereas the latter wanted the government only to facilitate private trading, the organization of trade in the Atlantic and particularly in Asia required a very specific combination of diplomacy, military effort, and foreign trading posts to control distant markets and withstand European rivals. Thus, the active involvement of the English crown in colonial trade was a sheer necessity, and altogether very similar to that of Venice and Genoa when they first ventured into the Islamic world in the eleventh century or, for that matter, any other colonial power in Europe in the sixteenth and seventeenth centuries.²³ As trade within Europe did not require this kind of intervention, and Continental princes in any case lacked the power to do so, England’s particular institutional trajectory of the seventeenth century with the crown as the protagonist of institutional change remains a poor guide to the institutional arrangements that supported the growth of trade within Europe before 1800.

      PRIVATE ORDER SOLUTIONS

      Now how could merchants prevent violent assaults or the opportunistic behavior of their agents without the support of sovereign rulers? The most extreme answer to this question is that foreign traders did not need the government because they relied on private order solutions instead. The history of European trade provides many examples of merchants organizing transactions privately. Whether in the Mediterranean, the Baltic Sea, or the Atlantic world, the commercial operations that emerge from account books and business letters invariably point to the crucial importance of personal relations in the organization of cross-border trade.²⁴ In the case of the Sephardic Jews or the Christians from Armenia it is very clear that merchants could build large commercial networks without any support of a home government.²⁵ The international diamond trade of the eighteenth century also suggests that informal agreements sufficed to close big deals, and in the first early modern stock markets of Amsterdam and London traders explicitly renounced government intervention.²⁶ It is not difficult to add more examples to show how friendship and kinship, shared cultural beliefs, and the prospect of repeat transactions helped merchants to keep agents honest. But would that prove that private order solutions can sustain international trade in a legally and politically fragmented world?

      Yes, says Avner Greif, that is exactly what happened in Europe during the Commercial Revolution of the eleventh and twelfth centuries, when merchants developed several institutional arrangements to trade at arm’s length without recourse to a third party. Jewish merchants trading between North Africa and Italy in the eleventh century, for instance, formed coalitions within which they shared information about agents in other locations. Their surviving correspondence suggests that regular interaction allowed the Maghribi traders to detect defaulters and to exclude them from future transactions, thus creating a strong incentive for individual members to honor their obligations.²⁷ Many more merchants in medieval Europe traded in guilds, consulados, and hanses—mercantile associations that paired a strong sense of community to collective liability for the debts of individual members and punishment through exclusion.²⁸ Some of these associations, the German Hanse in particular, were so well organized that they could credibly threaten foreign rulers to leave collectively in case they preyed on any one of their members.²⁹ Finally, quite a few legal and economic historians have argued for the existence of a medieval lex mercatoria, or law merchant—a uniform legal code distinct from existing Roman law, canon law, and common law, which would have emerged spontaneously from regular exchange between merchants from different local backgrounds.³⁰

      But were these collective arrangements truly self-enforcing? Did they allow merchants to govern long-distance transactions without any support from either central or local governments, or was there a constant interaction between public and private institutions? With regard to the coalition of Maghribi traders, Goldberg, Edwards, and Ogilvie and others have pointed out not only that they shared social norms and cultural beliefs, but also that their commercial transactions were subject to more formal rules enforceable by religious or lay judges.³¹ The sole survival of business letters makes it difficult to determine conclusively whether the Maghribi traders operated in the shadow of the law or not, but for merchant guilds and other communal institutions such formal embeddedness is beyond doubt.³² For instance, the law merchant referred to in several medieval texts actually comprised a narrow set of procedural rules instituted by local rulers to secure a speedy resolution of conflicts between visiting merchants.³³ Avner Greif has shown that the collective liability for debts that made it easier for merchants from different communities to trade with each other was anchored in customary laws allowing merchants whose property had been seized abroad to go to their local court to obtain compensation from the actual perpetrator.³⁴

      The embeddedness of private solutions in a wider framework of public institutions is most apparent from the organization of medieval merchant guilds. Everywhere in Europe merchants trading in foreign countries delegated control to corporate groups to negotiate privileges with foreign hosts, to resolve conflicts between them, or to monopolize a certain branch of trade.³⁵ Since many guilds performed a wide range of social and religious functions as well, they are sometimes considered paragons of collective action, but as far as the historical record goes, the merchant guilds were always and everywhere instituted with the explicit license of both their home government and their foreign host. This should not come as a surprise given that the guilds were indeed created to bargain with foreign rulers, to establish jurisdictions abroad, or to shield markets from competitors. Obviously, well-organized groups could apply more pressure than individual merchants could to obtain additional privileges or get compensation for damages from their host, but as the membership of most merchant guilds was large and in constant flux, the ability to act collectively typically hinged on the formal control delegated to the guild leaders.³⁶

      Even if the history of Europe’s merchant guilds confirms the importance of formal support for mercantile associations, this does not imply that merchants were unable to organize transactions privately. Surely there were many places where foreign merchants continued to organize in guilds until the eighteenth century, but in the commercial heartland of Europe merchants turned away from these formal bodies much earlier. In the Italian city-states, the Low Countries, and England merchants stopped delegating control to corporate groups and instead started building multilateral networks of relatives and friends who settled abroad with little or no formal support from their home governments. How could this be? Did commercial connections eventually become so dense that the prospect of repeat transactions sufficed to enforce contracts? Did the growing interaction between foreigners create a cosmopolitan culture that bridged the social distance between merchants with very different religious and cultural backgrounds? And should we then conclude that the self-enforcing institutions first observed during the Commercial Revolution of the eleventh and twelfth centuries reached their full potential only in the early modern period? Or did private order solutions even then depend on public support, albeit not from central governments but from the commercial cities that competed vigorously to attract international trade?

      URBAN COMPETITION

      In the High Middle Ages rulers everywhere in Europe created markets and fairs for the sales of agricultural surpluses from the surrounding countryside.³⁷ In many towns this market infrastructure never went beyond the most basic facilities, but there were also regions where individual fairs coalesced into cycles of fairs attracting trade for months on end and cities with permanent markets and a large, international clientele.³⁸ Successful commercial cities, I demonstrate in this study, continuously adapted their commercial, legal, and financial infrastructure to secure the continued presence of these merchants. They replaced temporary stalls with permanent vending locations. They adjusted tariffs and taxes to changes in the scale and scope of trade. They firmly regulated the work of brokers, money changers, and hostellers, but resolutely changed the rules when economic conditions demanded it. More than once cities traded a policy of exclusive privileges to some for free competition between all merchants. This responsiveness to change raises two important questions. Why was it so much easier for cities than for sovereigns to develop institutions to support international trade? And what drove these commercial cities to constantly adapt institutional arrangements to the changing needs of the merchants?

      The answer to the first question is rather straightforward: only cities commanded the financial and legal resources to provide the necessary public goods. In Europe before the Industrial Revolution most taxes were local taxes, and for cities it was relatively easy to fund port facilities, public vending locations, and the local court system from current revenue, notably because trade added considerably to their fiscal resources. Even the protection of merchants, whether through the city’s own defenses or through armed escorts of trade caravans or merchant fleets, remained a local affair, at least until the later seventeenth century when England and France started to fund their royal navies from state revenues.³⁹ Cities were also the most likely providers of legal support because almost everywhere in Europe the law was local, and this gave urban magistrates considerable leeway in dealing with the Continent’s legal fragmentation. They could accept the heterogeneity of contracting institutions and create consular jurisdictions to allow foreigners to settle commercial disputes according to their own rules, or they could incorporate foreign mercantile usage into their local customs and open their local courts to adjudicate the maritime, commercial, and financial conflicts of all merchants.⁴⁰

      Now, what motivated cities to continuously adapt institutional arrangements? Late medieval and early modern cities did not develop theoretically founded economic policies to strengthen their competitive position, let alone what urban planners today would call city marketing to attract new entrepreneurs.⁴¹ However, town magistrates did have an eye for new opportunities in manufacturing and trade, and they understood how specific rules or regulations could constrain or stimulate the urban economy.⁴² Under these circumstances specific groups of entrepreneurs, whether artisans in manufacturing towns or merchants in trading centers, could have considerable influence on the institutions governing exchange. Still, even in cities run by merchants, the private interests of the political elite did not necessarily coincide with those of the larger business community. The real question therefore is under which circumstances local magistrates, whether traders, artisans, lawyers, or otherwise, were willing to put aside their private concerns and serve the merchant community at large.

      This book argues that urban governments were motivated to adapt institutional arrangements because they expected to gain from the local concentration of regional and international flows of goods, money, and information. There were no predetermined winners of this competition because many cities in Europe had commercial potential. Local supply and demand for goods and services obviously differed between them, but the number of potential gateways within close proximity of each other was such that merchants always had a choice both for the location of their main seat and for the establishment of subsidiary branches.⁴³ Still, this urban geography would never have led a large number of cities to exert themselves if their competition had been a tournament with only one winner. Surely cities like Amsterdam and London stood at the very top of the urban hierarchy, and their gains from trade certainly were a prize worth fighting for, but the essence of international commerce was the interdependence of a large number of more or less central markets, who could still be very competitive despite a smaller range of goods and services, and a more limited access to other markets.⁴⁴ Therefore the efforts of individual cities were directed most of all to maximizing their connectivity with other markets.

      The potential benefits to individual cities were large. Not only did the growth of trade lead to the creation of a permanent commercial and legal infrastructure, but as foreigners immigrated and markets became thicker new forms of exchange emerged, for instance in debt finance, insurance, and stock trading. Increased imports and exports also induced the growth of local production and consumption, allowing cities to raise more taxes without damaging the economy. Consequently, commercial expansion strengthened the cities’ bargaining position vis-à-vis that of the central government.⁴⁵ Sovereigns relied on commercial cities for taxes and loans, which not only increased their commitment to secure property rights and contracting institutions, but also induced their active support for trade, for instance through the issue of safe-conducts or legal privileges to foreign merchants. The growing strength of monarchs after 1500 was at least partially due to their symbiotic relationship with major trading centers, and thus, even in absolutist states where the domestic economy suffered from serious infringements on private property rights, the central government remained very forthcoming toward the commercial cities in their realm.

      There were also systemic benefits that accrued to Europe as a whole. While medieval Europe had several commercial subsystems, each with its own institutional arrangements, the growing interaction between regions from the thirteenth century onward gave merchants and magistrates a wider menu of institutional choices on the local market, and it stimulated them to adopt contracting institutions that reduced the costs of trading with other cities. In the long run these institutional adaptations allowed Europe to catch up with the Middle East and China, where contracting institutions in long-distance trade were already highly developed and widely shared at the end of the first millennium. Indeed, after several centuries of urban competition Europe had developed a common set of contracting institutions—and these institutional arrangements were also more varied and sophisticated, a quality that would eventually make them the global standard in the nineteenth century.⁴⁶

      This obviously is a very optimistic appraisal, as if urban competition always and everywhere led to an optimization of institutional arrangements. That was not the case. The impetus for change differed with the economic opportunities of individual cities. In highly urbanized industrial regions neighboring cities might compete fiercely to become the principal outlet for local manufactures, whereas a single town in an underdeveloped region might feel no competitive pressure at all. Cities that were centrally located were also more attractive for the more or less footloose merchants who plied their trade over long distances, than ex-centrically located towns—a geographical reality that explains why in the seventeenth century institutional adaptation was a much more pervasive force in the Atlantic ports than for instance in the landlocked market towns of Central Europe.

      Perhaps the most serious constraint on institutional change was the actual deterioration of a city’s economic outlook. When cities were pushed to the periphery of the international urban network they became more susceptible to rent seeking by local elites, who tried to shape local institutions to maintain their share of a shrinking pie. This is very clear in the case of Lübeck and Venice when their commercial primacy faded during the sixteenth century. But even though they took a more hostile attitude toward new entrants, their institutions nevertheless remained in sync with the international standard, simply because the remaining merchants continued to trade internationally. Indeed, the survival of institutional know-how was such that even after long periods of economic decline, cities could regain a prominent role in international trade, witness the reemergence of Antwerp as one of Europe’s principal ports in the nineteenth century.

      Why was the adaptation of commercial institutions such a pervasive force in Europe before the Industrial Revolution? Some historians have pointed to the rise of an international culture of commerce.⁴⁷ In their view the constant interaction between merchants from around Europe created common business norms and beliefs that helped to bridge the social distance between merchants from different religious and cultural backgrounds. But even if cultural beliefs, as a rule, have a deep impact on the nature of institutional change, in this case the timing is wrong because a cosmopolitan culture emerged only in markets where foreign groups had come to know each other really well.⁴⁸ Indeed, institutional change in European trade derived from the exact opposite of a common culture, that is, the heterogeneity of the merchant community. In major commercial cities there always were many different groups of merchants, each with their own specific commercial, financial, and legal demands. Notably foreign merchants were easily tempted to move their business elsewhere, and to bind these footloose traders cities were forced to adapt institutional arrangements to their needs.⁴⁹ The pressure thus exerted resembles that of the boycotts Greif, Milgrom, and Weingast described for medieval merchant guilds, but it did not necessarily require collective action to get local governments to act because, by definition, any removal of a merchant strengthened a rival city.

      So why would rulers compete through institutional arrangements rather than the use of force? Surely the leading cities were powerful enough to hurt commercial rivals through tariffs, embargoes, or outright warfare—and they probably did, considering the high incidence of violence in the history of European trade. However, there were so many competing states in Europe with one or more important markets in their territory that sovereigns were careful not to prey on merchants in these cities.⁵⁰ They not just feared the direct loss of fiscal revenue or a higher cost of capital, but also realized they would play into the hands of their political rivals, as foreign merchants in particular were footloose and would not hesitate to remove their business to ports outside their realm.⁵¹

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